Samsung Q2 earnings beat estimates despite tumult of pandemic

A recovery in memory chip business and gadget sales helped quarterly profit

People at the Samsung Electronics gallery in Seoul, South Korea - the company on Thursday said its second-quarter operating profit increased 7.23 per cent. EPA

Samsung beat earnings estimates and gave a cautiously optimistic outlook, predicting that new smartphones and gaming consoles will boost demand for memory chips in the second half of the year.

Net income increased to 5.5 trillion won (Dh16.88 billion) in the three months ended June, the company said in a filing on Thursday, compared with the 4.9tn won average of estimates compiled by Bloomberg. The South Korean company had reported preliminary numbers earlier this month that showed operating profit rose 23 per cent.

Samsung, which is the world’s largest smartphone maker and also supplies components like memory chips, is navigating the tumult of the coronavirus pandemic, along with the rest of the tech industry. The company warned of a slump in its consumer business in the second quarter.

But sales of smartphones, televisions and other gadgets have started to recover, and the company said demand is likely to get a boost from the introduction of new game consoles and phone models, expected from Apple and Samsung itself.

“Covid-19 continues to cloud the demand outlook but structurally speaking, the demand is there,” Bloomberg analyst Anthea Lai said. “We’re getting there to have more 5G smartphones coming from Samsung and the expectation in the second half is to have more demand from consumers.”

Samsung shares rose as much as 1.9 per cent in Seoul trading, pushing gains this week to about 10 per cent. The company said it would not provide annual financial guidance because of the coronavirus uncertainty.

Though it is best known abroad for its phones, Samsung makes most of its profit from memory chips, used in everything from phones and consoles to servers that help deliver online services like video and music. Samsung said it anticipates the overall DRAM (dynamic random access memory chips) market to be up.

“Looking towards the second half, we do expect mobile demand overall to recover and also graphic demand to grow,” said Jinman Han, senior vice president of company's semiconductor business. “For servers, memory demand driven by stay-at-home activities seems to continue as Covid-19 and other uncertainties persist.”

The company’s own mobile devices, set to be updated with flagship Galaxy Note and Galaxy Z Fold releases shortly, are expected to improve revenue on a quarterly basis, but the company underlined that uncertainties related to Covid-19 will continue.

“We also think that customers may have increased their inventories during the first half of the year, so another variable to the second half demand is the direction of our customers’ inventory management,” said Han.

Samsung shares rose earlier in the week on news of Intel delaying 7nm chip production and likely need to outsource some future chip making to the likes of Taiwan Semiconductor Manufacturing Company (TSMC). Samsung is one of the few companies equipped to handle advanced semiconductor manufacturing, and the potential to garner more Intel business boosted market sentiment.

Aside from the impact of Covid-19, geopolitical issues are also likely to reposition the global supply chain in a way that will affect Samsung’s business. Bans on Huawei in the US and UK open more opportunities for Samsung to sell 5G networking gear and smartphones.

The mobile division of the world’s largest smartphone maker posted a 25 per cent increase in operating income to 1.95tn won. The Korean giant is expecting smartphone sales to rise in the third quarter with the launch of new Android devices including its foldable phone lineup but warned of intensifying market competition among smartphone makers that will strive to make up for weak performances during the pandemic.

“There is a possibility that the Galaxy Fold 2 will become a game changer in the smartphone ecosystem,” said Greg Roh, senior vice president at HMC Securities. “Most of the shortcomings found in the preceding model have been overcome with the ultra thin glass and a larger display.”

Samsung’s display division, which supplies organic light-emitting-diode-screens for Apple’s iPhones, posted operating profit of 300bn won. Although the display business suffered as the smartphone market slumped due to the virus, the loss was offset by reimbursement from Apple. Analysts have said the amount of payment was about 1.1tn won.

The consumer electronics unit, which includes TVs and appliances, posted 730bn won of profit. Samsung expects a recovery in TVs and digital appliances in the second half of this year thanks to pent-up demand after the virus lockdowns and holiday spending.